Most people think they know a franchise when they see one. In fact, franchising is a method of distribution, not a particular industry. There is no uniform definition of a franchise. As consumer protection statutes, franchise laws are given a sweeping scope by courts. Consequently, a broad variety of unsuspecting business arrangements may qualify as franchises.
At the most basic level, a franchise is defined by the coexistence of three elements: (1) a grant of rights to use another's trademark to offer, sell, or distribute goods or services (the “grant” or “trademark” element); (2) significant assistance to, or control over, the grantee's business, which may take the form of a prescribed marketing plan or what some jurisdictions more broadly describe as a “community of interest” (the “marketing plan variation” element; and (3) payment of a required fee (the “franchise fee” element). A franchise finding hinges entirely on whether an arrangement fits the applicable statutory definition. If any one statutory element is missing, the relationship is not a franchise.
The legal analysis considers the parties' actual practices, oral as well as written promises, and course-of-dealing evidence. A party cannot avoid a franchise relationship simply by disclaiming its existence. What the parties call themselves is immaterial. While federal and provincial jurisdictions that regulate franchises share common definitional approaches, each jurisdiction has its own definitional subtleties and mix of exclusions and exemptions. What qualifies as a franchise under the federal franchise sales law may not qualify under provincial law definitions, or vice versa. What is a franchise in one province may not be a franchise in all the regulating provinces in which the franchisor operates. Business owners and their advisers are not the only ones confused.
The companies that manufacture and distribute products or services or that license business methods, technology, patents, or trademarks to independent operators, should, as a preliminary matter, consider the possibility of unwittingly creating a franchise. In so doing, they should consult the franchise statutes, judicial opinions, and administrative guides of each jurisdiction in which the parties reside or intend to do business before their client offers an opportunity involving an express or implied trademark license or takes steps to modify or end the relationship.
format franchisee adopts the franchisor's business format and identifies
its independent operation by the franchisor's trademarks, in exchange
for which the franchisee pays the franchisor a fee. The franchisee's
operating methods are subject to significant control by the franchisor
or, alternatively, the franchisor renders significant assistance to the
franchisee in day-to-day operations. Fast food restaurants, convenience
stores, and real estate services are examples of business format
franchises. The product franchisee distributes goods identified by the
franchisor's brand manufactured by, or for, the franchisor. The
franchisee pays a fee for the distribution rights above the wholesale
price of the goods. As with business format franchises, the franchisor
exercises significant control over, or provides significant assistance
to, the franchisee. Automobile and gasoline dealerships and delivery
route distributors are examples of product franchises.